Strengthening The Barbell: Reshaping Nepal’s Economy through MSME Growth 

The new Government of Nepal has set an ambitious goal of reaching a USD 100 billion economy at a sustained economic growth rate of 7%, and a USD 3000 per capita income in the next 5 to 7 years. To achieve this, the government strongly emphasizes private sector-led development, envisioning businesses not solely as an economic activity, but also as instruments for national transformation. Such economic transformation has been led by private sectors worldwide, helping nations drive transformations throughout history.   

Micro, Small, and Medium Enterprises (MSMEs) represent the diverse range of small-scale businesses, from subsistence-level micro-firms to sophisticated medium-sized exporters, that drive economic growth and industrial development. Approximately 90% of all businesses registered in developing economies are MSMEs. In Nepal, they contribute to just 22% of the country’s GDP. These statistics make the structural imbalance in Nepal’s business sector evident. Nepal’s private sector is barbell-shaped with MSMEs at one end and large groups and conglomerates at the other end without many medium sized scaling firms in the middle. This barbell lacks medium-sized enterprises, which should be the engine for structural transformation. Accordingly, informal transactions make up around 40% of Nepal’s GDP with many of the MSMEs operating unregistered. According to the 2018 National Economic Census, 49.5% of economically active establishments operate unregistered, and among registered ones, only 52% maintain transaction records. This informality creates a significant structural strain, as a vast portion of the country’s economic output remains outside the formal tax net and regulatory oversight. This article explores a major question these numbers raise: are Nepal’s MSMEs failing to scale, or do they fail due to institutional structure? 

Why Scaling Matters 

While the benefits of industrial scaling are multifaceted, this section focuses on three pivotal drivers: export potential, employment creation, and the expansion of the national tax base. Globally, MSMEs constitute approximately 400 million enterprises, around 90% of all business firms, generating 70% of employment, and contributing up to 70% of global GDP. MSMEs are seen as a growth catalyst through increased innovation, job creation, and global economic development. As Nepal enters the era of Aid to Trade, MSMEs account for majority of trade in the private sector. In neighboring India, MSMEs contribute approximately 30% of the GDP, employing over 110 million people, and accounting for nearly 50% of total exports. Nepal’s MSME sector, operating in a similar regional context, has the same potential and can learn from India’s example. 

Employment creation, a frequently discussed topic within Nepal, can be solved with the scaling of MSMEs. There is an imbalance between the number of jobs available in the public service sector compared to the number of graduates. Each day, around 1500 Nepalis leave the country to join foreign labor markets. This outflow of labor is primarily driven by a lack of opportunity at home. The scaling of firms can assist in providing employment to youths locally helping mitigate the labor outflow problem. 

Similarly, the scaling of MSMEs is also beneficial for the government as they broaden the MSME tax base, increase tax collection, reducing the structural reliance on customs duties and remittance-backed consumption. In FY 2081/82 BS (2024/25 AD), remittance inflows equaled 28.2% of the GDP, a higher contribution to the GDP in contrast to MSMEs. 

Why Don’t They Scale? 

Despite the apparent benefits, we must understand the reason behind MSMEs’ failure to scale. There isn’t one specific reason for MSMEs’ lack of scalability, rather a combination of obstacles exists. This includes macroeconomic constraints as well as microeconomic and personal choice for business holders to remain small. Many cite access to finance as a major hindrance to growth. Nepal’s banking sector has historically been oriented toward collateral-based lending, a structural disadvantage for MSMEs that lack the land or fixed assets required to secure credit. While microfinance and alternative investments including private equity, hedge funds, real estate, and commodities.have expanded access to finance, a proportionate comparison with the number of firms and the availability of finance is still lacking. 

Deficits in skilled human capital compound this problem. The Department of Foreign Employment (DoFE) issued 3.4 million labour permits between 2014/15 AD to 2023/24 AD, a significant portion of the Nepali working population. This outflow of labor also includes skilled workers that assist in the growth of MSMEs. Importantly, there is a self-reinforcing cycle: MSMEs cannot scale without skilled workforce, and skilled workforce leave the country due to the inability to offer career trajectories compared to foreign counterparts.  

Similarly, MSMEs face a navigation problem in foreign markets due to a lack of proper information and knowledge. According to the World Bank, Nepal’s performance is 2.51 on logistics performance index, which is a benchmarking tool that measures a country’s trade efficiency by evaluating its customs processes, infrastructure quality, shipment pricing, service standards, consignment tracking, and delivery timeliness. Nepali firms fail to meet global/international quality standards and certification requirements. Nepal’s MSMEs still lack the brand identity, compliance infrastructure, and distribution networks needed to compete on quality and differentiation in global markets. They also find it difficult to compete on prices with large-scale foreign manufacturers in the global market. The result is a ceiling on growth in the domestic market, and without the volume that export markets provide, many MSMEs simply cannot achieve the economies of scale to make them competitive. 

Addressing The Problems 

There is no single solution that addresses all the problems MSMEs face while scaling; it requires a more targeted approach toward each problem. A solution likely to yield stronger results is the prioritization of quality of MSME development over quantity. A starting point is sector identification by both the government and the firms. Not all MSMEs scale equally, and not all sectors offer the same growth trajectory. Nepal has demonstrated competitive potential in agro-processing, handicrafts, tourism-linked services, information technology, and niche manufacturing. The new government has also identified four pillars for growth: hydropower, tourism, agriculture, and technology. A strong policy focus on these sectors with tailored support for market access and skills development can be more effective than generalized MSME promotion. 

Likewise, diaspora investment in MSMEs is also an underutilized source. Policies that make it easier for diaspora Nepalis to invest in domestic businesses through tax incentives and dedicated financial instruments can bring productive capital into the national economy. To attract diaspora capital, we can learn from India on diaspora bonds and Overseas Citizen of India (OCI), the government can focus on financial instruments and securing legal rights that treat the diaspora as permanent economic partners rather than temporary visitors. Currently, there is a minimum capital requirement for foreign investment of NPR 20 million (approximately USD 150,000). Although this capital requirement is not designed for the Nepali diaspora, they fall under the same category while trying to invest in Nepal. At that threshold, the Nepali diaspora who meet the requirement are likely to channel their capital into a large established enterprise rather than into MSMEs that need it the most. 

Finally, policy must provide serious incentives for the formalization of micro-enterprises. Much of Nepal’s economic activity is in the informal sector, businesses too small, too cash-based, or too compliance-averse to register and formalize. Formalization needs simplified business registration and predictable and anticipatable tax changes that assures business safety. The barbell can start to fill in from informal to formal MSME status through simplified registration, and access to formal financial services, providing meaningful incentives to make this transition. 

Conclusion 

Nepal’s MSME challenge shouldn’t be viewed as a story of failure but rather as a treasure trove of untapped potential. A potential that can be realized with the right set of institutional and structural support. The government has signaled a commitment to creating an environment more conducive to private sector growth, which is a positive sign. If these commitments are translated into consistent and sustainable policy actions, the structural conditions that have built the barbell-shaped economy can begin to change. With new faces in the finance ministry, expectations remain high. In the upcoming budget for the fiscal year 2083/84 BS (2025/26 AD), we can picture a suitable advantage for MSMEs through increased access to finance, tax breaks, incentives and support in innovation. 

Finally, Nepal’s economy can begin to shift from remittance-backed consumption to growth and innovation-led consumption through the increase in MSMEs scaling. MSMEs remain a crucial priority for governments, policymakers, and financial institutions in developing countries to foster economic growth. As MSMEs target and assist the vital aspects of an economy through sustainable economic growth, a wider tax base, increased local employment opportunities, and poverty alleviation, Nepal needs the growth and scaling of MSMEs to achieve its economic growth goals.